Iowa Public Pension Plan is the Latest Fund to Cut Expected Returns

Terry Branstad, governor of Iowa, speaks to members of the media in the lobby at Trump Tower in New York on Dec. 6, 2016 (Photo credit: Albin Lohr-Jones/Pool via Bloomberg).

The Iowa Public Employees Retirement Systems
Investment Board has voted to lower its assumed annual rate of
return to 7 percent, from 7.5 percent, in the most recent rate
cut by public pensions grappling with expectations that are set
too high.

With the new assumed return and using data from 2016,
IPERS funded ratio is now 80 percent, down from 84
percent, the pension system said March 24. Iowa
Governor Terry Branstad said this week that he supports the
move, including using increased contributions from workers and
state and local governments to cover the additional $1.3
billion in unfunded liabilities.

The rate assumption is an important metric used to determine
how much taxpayer money is set aside to pay future pension
checks, with lower expected return rates often meaning higher
contributions into the system from workers and governments.
Several other pension systems have already lowered their
expected investment returns over the past year, including the
Illinois Teachers Retirement System and the California
Public Employees Retirement System, while the
Houston Firefighters Relief and Retirement Fund may
be next.

Too many states have overestimated the revenue in
their pension funds, and as a result are in big trouble,
Branstad said Monday at the Iowa Capitol,
as reported by The Des Moines Register. We
have seen what has happened with many cities. We have seen what
has happened in the neighboring state of Illinois, and it has
happened in many other states around the country.

Most public pension plans in the U.S. have an assumed
investment return between 7 percent and 7.5 percent as of
February, according to the National
Association of State Retirement Administrators. The Houston
Firefighters Relief and Retirement Fund has the highest
assumed rate of return at 8.5 percent, though this could be
lowered to 7 percent as part of the City of Houstons
proposal to reform its pension plans. The proposed cut comes
after the fund suffered net losses of 1.23 percent in fiscal
2016 and returns of just 1.29 percent in 2015. The rate cut
will be considered by the Texas Legislature this year.

Illinois Teachers Retirement System cut its assumed
rate of return to 7 percent, from 7.5 percent, in August 2016.
ITRS is the largest of the states five state-run
retirement systems, which are among the most underfunded in the
country. Illinois pension debt jumped to $130 billion in
2016, up from $111 billion the year before, according to
Illinois Policy, a nonprofit public policy institute in the
state.

The California Public Employees Retirement System, the
countrys largest public pension fund, followed suit in
December, voting to lower its 7.5 percent rate in increments
reaching 7 percent by 2020, after failing to reach the 7.5
percent target in the previous two years.

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